Subprime Mortgage Design
Posted: 29 Oct 2008 Last revised: 30 Jul 2013
Date Written: 2012
This paper offers evidence on the design of subprime mortgages as bridge-financing products. We show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short-horizons. High rates of early prepayments on subprime mortgages are suggestive of the use of prepayments as an exit option. This paper argues that high early defaults on post-2004 originations can be explained when one considers high early prepayment rates for pre-2004 originations.
Keywords: mortgages, subprime, refinance, prepayment, crisis
JEL Classification: G21, D82, D86
Suggested Citation: Suggested Citation